With a strong determination to cleanse the economic environment, make the processes transparent and improve India’s ranking in ‘ease of doing business index’, the Modi government embarked on introducing several economic reforms.
In a series of new regulations, Insolvency and Bankruptcy Code 2016 (IBC), which came into force in August 2016, is undoubtedly a remarkable piece of legislation which has been hailed as a one-stop solution for insolvency and liquidation for corporate.
The long title of the IBC 2016 very rightly describes its purpose and essence:
“An Act to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner for maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto.”
All stakeholders, especially the creditors welcomed this legislation as it was an amalgamation of all previous solutions as well as it shifted stance from a debtor to creditors, thus, empowering the creditors.
The USP of this Act remained in its two core aspects: a) time-bound resolution and b) maximization of value; this raised high hopes amongst creditors who were burdened hugely by almost Rs 10 lakh crore of bad debts.
The frame workers of the Code were acutely aware of how the unpaid debts were dragging down the entire Indian economy and hence, they tried to put in provisions to restructure the insolvent company effectively and if not possible to do so, liquidate the company and repay the creditors.
IBC faces Speed Bumps, Roadblocks & Detours
"However well-intentioned a piece of legislation maybe, a few hiccups are always there during the initial stages."
The same happened with IBC and the law which is still in its infancy is facing numerous teething problems, thus, delaying or derailing the whole process.
Be it disgruntled debtors, or dissatisfied financial or operational creditors, many insolvency cases have reached the doorstep of the Supreme Court, in hopes of justice and a better deal. Litigations, in cases when an effective conclusion under IBC was not reached, have slowed down the entire process and it obviously threatens to erode the very essence of the Code.
In its 3 years journey, IBC has been facing challenges as the ambiguities and bottlenecks in it has resulted in many fissures and roadblocks; resulting in most cases overshooting the resolution timeframe of 270 days.
Ordinances & Amendments to iron out the creases of IBC
As diverse cases of IBC get delayed, the Insolvency and Bankruptcy Board of India (IBBI) is taking cognizance of each roadblock that comes to fore and is working overtime to plug in the holes.
As a result, we have seen amendments in the norms, provisions and regulations of the IBC which has helped in strengthening the process and provided it more teeth. In a step forward in this direction, the Cabinet has recently cleared another ordinance to further amend insolvency law.
"To establish the Code as the most relevant tool of corporate insolvency and bankruptcy, modifications and amendments are vitally essential."
Latest IBC Ordinance cleared by Cabinet: A Positive Step
"IBBI has kept its eyes & ears open and has been pursuant in its endeavour to overcome the roadblocks of IBC, thus, smoothening the process for stakeholders."
From time to time the IBBI has brought about changes and modifications in the IBC to streamline the process of corporate insolvency and move decisively towards achieving the real objective of IBC.
Hence, the IBC has already been amended thrice in its 3 years of short journey and in the process, various sections have been changed as well as many new sections inserted.
In the latest development, on December 12, 2019, the government introduced a bill in the Lok Sabha to amend the Code once again. Thereafter, the Union Cabinet on December 24 approved an ordinance to further amend the Insolvency and Bankruptcy Code (IBC).
This is in an attempt to remove impediments pertaining to it and henceforth, taking another important step towards streamlining the corporate insolvency resolution process.
The most prominent factor in this amendment is that it will provide insulation to the successful bidders from being prosecuted of criminal proceedings for offences that were committed by previous promoters of the concerned companies.
Trigger for this Amendment
The need for this move came to the fore after in several instances the investigation agencies had filed cases against companies besides erstwhile promoters that were undergoing resolution process.
This unpleasant situation created great concern in the industry among the investors and they represented to the government on the issue, urging action and seeking relief.
The government, which is putting in all efforts to make IBC effective and relevant, took this plea in complete seriousness and hence, the bill came into being.
Shield of Security from Future Upheavals
Updating on the latest development the Union Minister Prakash Javadekar informed that the Cabinet has cleared an ordinance to amend the Code.
"The amendment will remove certain ambiguities in the IBC, 2016 and ensure smooth implementation of the Code," the release said.
Domain Experts have hailed this step and they believe that this step will help in plugging loopholes in the way of corporate resolution.
Manoj Kumar, partner, Corporate Professionals, throws more light on this ordinance and says, “Finality of cost and litigation risks are critical for investment decisions...Thus, these amendments are expected to remove hurdles being faced in a resolution of some high-value insolvency cases and ensure better realisation for the stakeholders.”
In this regard the Bill text describes the two important provisions as such:
"32A. (1) Notwithstanding anything to the contrary contained in this Code or any other law for the time being in force, the liability of a corporate debtor for an offence committed prior to the commencement of the corporate insolvency resolution process shall cease, and the corporate debtor shall not be prosecuted for such an offence from the date the resolution plan has been approved by the Adjudicating Authority under section 31.”
“32A (2) No action shall be taken against the property of the corporate debtor in relation to an offence committed prior to the commencement of the corporate insolvency resolution process of the corporate debtor, where such property is covered under a resolution plan approved by the Adjudicating Authority under section 31, which results in the change in control of the corporate debtor to a person, or sale of liquidation assets under the provisions of Chapter III of Part II of this Code.”
What it Means
In simple language, the amendments involve the insertion of Section 32A in the Code and by doing so government agencies will be restrained from attaching assets of an insolvent debtor undergoing bankruptcy resolution for prior offences.
In addition, the assets of companies undergoing liquidation will also be protected from any action from government agencies.
Thus, it will work as a protection shield for the winning bidder against all liabilities of a corporate debtor for an offence committed prior to the commencement of the insolvency resolution process.
The amendments, as an exception, specify that in case of criminal proceedings prosecution against promoters or management shall be allowed.
"A much-needed relief for investors that will definitely boost their confidence in the Code and make the prospects of investing more attractive!"
Bill referred to Standing Panel
The Insolvency and Bankruptcy Code (Second Amendment) Bill has been referred to the standing committee on finance by the Lok Sabha Speaker Om Birla.
This committee is chaired by the BJP MP and former minister of state for finance Jayant Sinha and has the former Prime Minister Manmohan Singh as its member. The committee has been given the responsibility to examine and submit the report on the bill within three months.
Informing about the Bill, the Lok Sabha secretariat said, "Members are informed that the Speaker, Lok Sabha, has referred the Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019, as introduced in Lok Sabha, to the Standing Committee on Finance for examination and report within three months."
This amendment is a paradigm shift from the previous stand and is seen as a pro-active legislative step being taken by the government to address the serious issues being faced by the industry with respect to IBC.
Insertion of 32A is a positive step that will help secure the spirit and essence of IBC and help in strengthening the entire process. By providing financial immunity to the corporate debtor it ensures confidence building for new acquirers, thus, eliminating the risk factor that was hanging all the time and worked as a deterrent.
"This step will not only see more bidders queuing up for the stressed assets but also, will lead to a hassle-free acquisition. In addition, it will result in value maximisation for the creditors, thus, benefitting all stakeholders."
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